FDIC Enforcement

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On July 5, 2017, the U.S. District Court for the District Columbia, in the lawsuit filed in 2014 challenging “Operation Choke Point” — a federal  enforcement initiative involving various  agencies, including the Consumer Protection Branch of the Department of Justice (DOJ), the Federal Depository Insurance Corporation (FDIC), the Federal Reserve (Fed), and the Office of the Comptroller of the Currency —  denied the  agencies’ motions to dismiss and/or for summary judgment and permitted the payday lender-plaintiffs’ due process claims to proceed.

Initiated in 2012, Operation Choke Point targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In June 2014, the national trade association for the payday lending industry and Advance America, a payday lender, initiated the action against the FDIC, Fed, and the OCC.  The lawsuit alleged that certain actions taken by the agencies as part of Operation Choke Point violated the Administrative Procedure Act (APA) and that Operation Choke Point violated their due process rights.  The court granted the agencies’ motion to dismiss the defendants’ APA claim and, although ruling that the due process claim could proceed, subsequently dismissed the trade association as a party for lack of standing.  Following the addition of  six new payday lenders to the complaint, the agencies moved to dismiss the new payday lenders’ due process claim for lack of standing and failure to state a claim, and moved for summary judgment as to all plaintiffs on the basis that they cannot show that they suffered a deprivation of liberty without due process.

The Court rejected the agencies’ arguments, holding that the newly-added plaintiffs had established both standing and a plausible claim for relief, and concluding that the agencies were not entitled to judgment on any of the plaintiffs’ due process claims.  First, the Court rejected the agencies’ attempt to challenge the new plaintiffs’ allegations of future harm — i.e., their potential for future loss of access to the banking system, and potential preclusion from the payday lending industry — finding that they demonstrated the requisite elements of standing, and stated a plausible claim for relief, by alleging that they previously lost bank accounts as a result of Operation Choke Point, and that they will continue to do so if the agencies’ actions continue.

The Court also held that the agencies’ were not entitled to summary judgment on any of the plaintiffs’ due process claims.  The court rejected the agencies’ argument that plaintiffs could not show a due process violation where they “continue to access the banking system and remain quite profitable.”  According to the court, the agencies had not definitively demonstrated that plaintiffs would “not be put out of business by the continued regulatory pressure from Federal Defendants.”

The Court was also unmoved by the agencies’ argument that plaintiffs “are able to pursue other lines of business.”  In support of that argument, the agencies cited cases finding no due process violation where the plaintiffs were barred from conducting business with the government, but remained free to transact with private individuals and entities.  The court held that these cases, which distinguished between a person’s ability to sell services to the government versus one’s ability to sell services at all,  did “little to support [the agencies’] argument that the Due Process Clause tolerates the destruction of an entire line of Plaintiffs’ business, so long as there are other lines of business they can pursue.” Citing to the Plaintiffs’ Opposition, the Court observed that “it would be of little consolation to an attorney, driven from his practice by improper governmental stigma, that McDonalds is still hiring.”

Despite the change to a Republican Administration, lawmakers continue to raise concerns that Operation Choke Point remains in operation.  In a letter to Attorney General Jeff Sessions dated July 6, 2017, Republican Senators Mike Crapo and Thom Tillis stated that “[w]hile many would claim that this program has ceased to operate, this does not appear to be the case as we continue to receive complaints that indicate the program is still in effect.”  The Senators asked “that DOJ review all options available to ensure lawful businesses are able to continue to operate without fear of significant financial consequences, which should include taking the additional step of issuing a Statement of Enforcement Policy that Operation Choke Point is no longer in effect and that administrative subpoenas issued pursuant to DOJ’s civil investigative authority under [FIRREA] may be issued only where there is an articulable suspicion of illegal activity being conducted or facilitated by the intended recipient of the subpoena.”

Legislation has also been proposed in the House, with Republican Congressman Blaine Leutkemeyer (R-Mo.) introducing a bill (H.R. 2706) that seeks to prevent future recurrences of Operation Choke Point by limiting the authority of banking regulators and the DOJ.

The FDIC announced last week that it had entered into settlements with Bank of Lake Mills and two non-bank “institution-affiliated parties” through which the bank originated loans for allegedly engaging in unfair and deceptive practices in violation of Section 5 of the FTC Act.  The settlements should serve as a reminder to non-banks entering into arrangements with FDIC-supervised banks that they can become subject to FDIC enforcement authority.

The FDIC did not release the underlying stipulations and consent order and only released the orders requiring payment of restitution and civil money penalties.  The orders require the bank and two non-banks, Freedom Stores, Inc. (FSI) and Military Credit Services, LLC (MCS), to pay approximately $3 million in restitution to eligible borrowers and civil money penalties of, respectively, $151,000, $54,000, and $37,000.

The orders describe eligible borrowers as having received loans from the bank through “FSI and MCS channels.”  It would appear that, because the non-banks originated loans on behalf of the bank, the FDIC deemed the non-banks to be “institution-affiliated parties” under 12 U.S.C. section 1813(u)(1) which defines an “institution-affiliated party” to include any ” agent for an insured depository institution.”

According to the FDIC’s press release, the bank, FSI, and MCS violated Section 5 by practices that included:

  • Charging interest to borrowers who paid off their loans within six months when the loans were promoted as interest free for six months;
  • Selling add-on products without clearly disclosing the terms of those products; and
  • Failing to provide borrowers the opportunity to exercise the monthly premium payment option in conjunction with the purchase of optional debt cancellation coverage

In December 2014, FSI and MCS entered into a consent order with the CFPB to settle allegations that the companies had engaged in unlawful debt collection practices in violation of the CFPA UDAAP prohibition.